The revolutionary message Satoshi Nakamoto left on the Bitcoin genesis block

Six days later, on Friday, January 9th, 2009, he released the first implementation of the Bitcoin Core software, effectively launching the Bitcoin Blockchain.

Currently, no one knows who Satoshi Nakamoto is. Maybe he’s one person. Maybe it’s a group of people.

He claimed to be a man, born in 1975, living in Japan. However, most people don’t believe this.

In fact, several individuals have been considered candidates for the true identity behind Satoshi Nakamoto, most notably Craig Wright, who attracted much fanfare when he publicly claimed to be Satoshi in May of 2016. His claim is now widely regarded as a hoax.

What is Bitcoin?

Put simply, Bitcoin is the world’s first peer-to-peer digital currency.

You can send Bitcoin directly to someone else without going through a financial institution or other third party.

“This isn’t [just] money, it’s a decentralized trust network”

Andreas Antonopoulos

I cannot emphasize enough how revolutionary the italicized portion of that phrase is.

We’ll discuss how the Bitcoin Blockchain works in the ensuing paragraphs. For now, let’s look at a decades-old problem that Bitcoin elegantly solved.

The Double-Spend Problem

Why do you value the twenty-dollar-bill in your pocket? Probably because it’s worth twenty dollars and you can exchange it for something else that’s also worth twenty dollars.

Since it’s a physical note, whenever you decide to exchange it for a product or service, the seller of that product or service is confident the same twenty-dollar-bill doesn’t exist elsewhere – it’s unique.

What about digital money? How can a seller be confident you won’t just copy and paste that same $20 to hundreds of other merchants?

This is called the double-spend problem, and prior to Bitcoin, the only way to solve it was to use a trusted intermediary like a bank or credit card company.

The “double-spend problem” refers to how digital currency can be spent more than once

Bitcoin was the first attempt at creating a digital currency that didn’t need a trusted third party, and instead relied on complex algorithms, digital signatures, and a decentralized peer-to-peer network.

It not only succeeded, it changed the world.

Why Does Bitcoin Matter?

So why are people paying almost $1,300 for one Bitcoin? Why were over 100,000 merchants – worldwide – accepting Bitcoin as early as February 2015? In other words, why does Bitcoin matter?

I’ll boil down the significance of Bitcoin to three interrelated innovations:

1) Bitcoin was the first digital currency to solve the double-spend problem

2) In doing so, Bitcoin created the Blockchain – a technology many are hailing as the “second internet”

3) The Bitcoin Blockchain is public, free, and not controlled by any single authority. This means, Bitcoin the currency, is also not controlled by any single authority

Within each of these 3 breakthroughs are several important inventions as well. For example, algorithmic Proof-of-Work mining: how the network processes transactions and issues new Bitcoin. In fact, let’s take a look at how the whole thing works.

How Bitcoin Works

Let’s assume you already own some Bitcoin (if you don’t, scroll below to learn how to buy it).

If you purchase a product from a merchant who accepts Bitcoin, you would simply scan a QR code with your smart phone.

The price of the product is converted from dollars to Bitcoin (currency symbol: BTC) based on the prevailing exchange rate.

After reviewing everything, you would authorize the payment, and voila – a Bitcoin purchase!

As you can probably tell, it’s very much like your typical credit card payment, and just as fast – a few seconds.

Now let’s take a look at the mechanics under the hood.

The Bitcoin Blockchain

The elaborate system that runs Bitcoin is fairly complex. This will be a very general overview of how the hypothetical transaction described above flows through the Bitcoin Blockchain.

I’ll start by listing a few basic definitions that I’ll be using throughout this article:

• Protocol – rules defining how everything should communicate on the Bitcoin network

• Block – A collection of validated, timestamped transactions on the Bitcoin Blockchain

• Hash – the output of a complex cryptographic “hash algorithm”

• Nonce – an arbitrary number used to generate hash outputs

After scanning your QR code, reviewing the cost, and deciding to buy, you authorize the transaction and send the required amount of Bitcoin to the merchant’s address (public key) using your private key. Most of this would be handled by your wallet software, oblivious to you.

The transaction is now broadcast to the Bitcoin network. Several mining nodes pick up the transaction, validate it, then include it in a newly created block. They receive a small fee for this.

Every 10 minutes or so, a new block is created and confirmed. After about an hour, five more blocks are added “on top” of your block. This means your transaction has now been confirmed six times.

As a rule of thumb, once a transaction has been confirmed six or more times, it’s considered permanent. This is because it would be extremely difficult for anyone to go back six blocks and recalculate each block.

This difficulty increases exponentially as additional blocks are added on top of your block, increasing the permanence of your transaction.

This “difficulty” is actually the key innovation of Bitcoin, and is what makes a decentralized network possible. It’s called, Proof-of-Work (PoW).

Mining and Proof-of-Work

Proof-of-Work (PoW) refers to the processing of data such that an output is difficult to produce. However, it’s fairly easy for others to review that output and verify that a person actually spent the computational resources required to produce it.

Mining involves the processing of Bitcoin transactions and the creation of new Bitcoin – similar to how central banks print money – except, Bitcoin does this predictably and algorithmically.

As miners are validating transactions, and adding them to new blocks, they are also competing for newly minted Bitcoin using proof-of-work.

Bitcoin mining and other activities allegedly consume 600 megawatts – enough to power a city of 300,000

Each miner is required to produce a hash of the candidate block header. This hash must be less than a specified target value – in other words, it must contain a certain number of preceding zeros and be less than the target.

For example, in the scenario below, the hash has the required number of preceding zeros, and “24fd” is less than the target’s “24fm.”

Bitcoin mining therefore consumes an enormous amount of electricity. One source puts the total electricity consumption of the Bitcoin network at 600 megawatts – enough to power a North American city with a population of 300,000.

While this is arguably Bitcoin’s most significant drawback, it’s also the network’s “superpower” (pun intended).

The electricity, and more specifically, the computational effort – or hash rate – required to keep the network running, prevents malicious attackers from attempting to tamper with the Bitcoin Blockchain.

Depiction of a Bitcoin mining setup

Furthermore, since the network has almost 6,000 nodes, randomly coming on and off the network, and processing transactions almost simultaneously, there must be some way for the network to consistently select the authoritative chain of transaction blocks, as several may be created at any given moment.

In other words, the network must achieve consensus.

Blockchain consensus is an interesting topic, but to make a long story short, the Bitcoin network always selects the chain with the most computational effort as the “official” record.

Looking Forward: Pros and Cons

CONS

As I noted above, electricity consumption (and its related issues) is perhaps the most important problem facing Bitcoin today. In my opinion, other notable challenges include:

Scalability:

Bitcoin has become more popular than most anticipated. How will it adapt as it transitions from being a techie’s cryptocurrency to being the dollar’s kryptonite? The infamous block size debate is case in point

Volatility:

For Bitcoin to be widely used as a currency, it must achieve better stability. Bitcoin prices can swing wildly, even intraday

Complexity:

To use Bitcoin and store it securely, a certain level of technical ability is required. My mother wouldn’t touch those scary Bitcoin addresses with a 10-foot pole

Irrevocable transactions:

Once a Bitcoin payment has been sent, it can’t be revoked. It’s gone forever

Permanent loss:

If you lose your private key, the funds accessed by that key are also lost – forever

PROS

Despite these challenges, I’m still a Bitcoin advocate. Here’s why:

Peer-to-peer payments:

In my opinion, if Bitcoin became widely adopted and more user-friendly, it’s impact would be even more significant than what we’re seeing today. I still view disintermediation as Bitcoin’s crowning achievement

Nominal fees:

A miner will receive a small fee for including your transaction in a block. This is usually no more than a few cents. Compare that to the 2-3% charged by your bank or credit card company

Zero merchant fees:

In addition to the ridiculously low fees, merchants who accept Bitcoin get charged absolutely nothing by the network

Privacy:

Although technically not anonymous, Bitcoin transactions don’t require the use of any personal details like your name or address (i.e. they are “pseudonymous”)

A public immutable record:

All Bitcoin transactions are public. Anyone can view them. Once a transaction is confirmed, it has a permanent place on the Bitcoin Blockchain. Obviously, this feature has its drawbacks, but in my opinion, it’s an auditor’s dream

No one “owns” the Bitcoin network:

Bitcoin is not a central bank, or company. It’s owned by everyone, and no one. Your account can’t be controlled by anyone else (unless they have your private key).

The currency is designed to be deflationary, which has pros and cons. But think about it, no quantitative easing, no bailouts, no limits…actually there is a limit – the last of 21 million Bitcoin will be minted in 2140…

Buying Bitcoin

Choose a wallet

By now, you’re probably itching to go out and buy yourself some Bitcoin. Before you do that, get yourself a wallet.

Most digital wallets out there are online applications or “hot wallets.” These are great for speed, convenience, and ease of use.

However, once you amass a significant amount of Bitcoin, the safest way to store it would be offline “cold storage.” This involves paper wallets and hardware wallets.